Concentration
Concentration is holding too much of an account in one stock, sector or product, so that a single decline wipes out what diversification would have protected. Tracy Pride Stoneman represents investors in these claims in FINRA arbitration nationwide, from Westcliffe, Colorado.
By Tracy Pride Stoneman, securities arbitration attorney Updated
The incentive is not subtle: illiquid investments pay the stockbroker far higher commissions than liquid ones. A portfolio that is 60% in one private placement did not get that way by accident.
Over-concentration frequently appears alongside a suitability violation, and the two are usually argued together. Ms. Stoneman has successfully represented hundreds of investors in concentration cases.
| What happened | Rule or law | How it is proved |
|---|---|---|
| One position or sector dominates the account | FINRA Rule 2111 (suitability); Regulation Best Interest care obligation | The position as a percentage of liquid net worth, against age, income and time horizon. There is no bright-line number; panels weigh the percentage against the customer |
| No recommendation to diversify or hedge as the position grew | Rule 2111; Rule 2090 (Know Your Customer) | Statements showing the position climbing with no contact notes about risk |
| Margin on a concentrated position | FINRA Rule 4210 (margin requirements); Rule 2264 (margin disclosure statement) | Margin calls and forced liquidations at the bottom |
| Concentration in employer or inherited stock the broker never addressed | Rule 2111 | Rollover and transfer paperwork; whether a diversification plan was ever discussed |
A FINRA panel can award compensatory damages (out-of-pocket losses or market-adjusted “well-managed account” damages), interest, costs, attorney’s fees where a statute or contract allows them, and punitive damages in egregious cases. Claims must be filed within six years of the events under FINRA Rule 12206, and shorter state statutes of limitation may also apply.
If any of this sounds like your account, the next step costs nothing: a free, honest evaluation. Tell me what happened or call (719) 783-0303.
Common questions
Concentration: what clients ask
How much in one investment is too much?
There is no single number, but an investment large enough that its failure would seriously damage your finances is a warning sign, especially for investors who need income or are near retirement.
Is concentration a claim on its own?
It is usually brought as part of an unsuitability or negligence claim: the broker recommended or maintained a portfolio that was not appropriate for you because it lacked diversification.
Has Tracy written about this?
Yes. Tracy Pride Stoneman and Douglas J. Schulz co-authored “Concentration: Too Much of a Good Thing?” in the PIABA Bar Journal. It is available on the Publications page.
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Tell me what happened. I will tell you honestly whether you have a case worth pursuing — and every way I can be paid, including contingency: nothing unless you recover.